I just got a call from Citibank. Apprarently they were not satisfied I am with debt with them with one credit card. They offered me a Mastercard this time. He was a nice guy but he told me I could use a second card for emergencies. Remember what I said before in the Art of War? Know your enemy and know yourself. I understand compound interest having been hurt by it before. I also if I took that card an emergency would be an XBOX 360 that would have the 3 red rings of death in about 6 months while the debt balloons.
All you kids who are half my age or more, learn this stuff early. Don't learn the hard way like some of us adults.
I should just be thankful they were soliciting and not collecting.
http://www.finweb.com/investing/compound-interest.html
http://www.epinions.com/content_37520838276
http://www.getrichslowly.org/blog/2006/06/08/the-wealthy-barber/
http://www.universitycu.org/Let_Compound_Interest_Work_for_You.htm
The Magic of Compound Interest
There’s a very important question that you should ponder right now, especially those of you who have not begun some type of investment program. And that question is, ‘Who’s working for whom?’ Are you working for your money, or is your money working for you? If it’s your money that’s not doing any work, then you should seriously consider putting it to work; hard, rigorous work. How do you do this? By putting it into an investment instrument which has a compounding interest structure.
With compound interest, your money works diligently for you, continually feeding upon itself to grow at a substantially faster rate than with simple interest. Although many have attempted to make this type of interest complicated, it’s actually very straightforward and easy to understand. Compound interest simply pays you interest on your principal; then, when it’s time to pay interest again, you’re paid interest on your principal and the previous interest that you earned. In other words, the interest that you’re paid adds to and becomes part of the principal that accrues interest during the next period. You have a continuously growing principal amount without having to make another deposit. But if you do choose to make regular deposits to go along with your automatically-growing principal, over time the results can be positively staggering. It’s no wonder that Albert Einstein called compound interest "the eighth wonder of the world".
One of the ‘secrets’ of the wealthy is long-term investments that pay compounded interest. Every savvy investor, when given a choice between a good investment with compound interest and a great investment with simple interest, will pick the good investment every time. They know that, over time, the investment that compounds will outperform the other.
Here’s an example. Let’s say you have three friends; Charlie, Kim, and Sally. Each one has money to invest. Charlie has $30,000. Kim and Sally each have $10,000 to invest. Charlie places his money into a 30-year investment which pays 12% simple interest annually. Kim and Sally also put their money into 30-year investment vehicles at 12% annual interest. However, theirs’ is compound interest, with Kim’s compounding yearly and Sally’s investment compounding quarterly.
After 30 years, here’s what their accounts would look like:
* The total value of Charlie’s investment has grown to $138,000 (principal and interest).
* The total value of Kim’s investment is $299,599.22.
* The total value of Sally’s account has become $347,109.87.
* Moreover, if Sally made $50 additional deposits every two weeks during the 30-year period, her balance would increase to $755,859.58!
As you can readily see, even though Charlie had three times as much money to invest initially, the compounding investments of Kim and Sally greatly outperformed his investment in the long run. But let’s hit a little closer to home.
Most of us don’t have a large sum to sink into an investment for thirty years. What would it be like if Sally only had $100 to invest, but she could continue to deposit an additional $100 into the account every month over the full thirty years? At a more real-worldly compounded rate of 8%, let’s see how she’d fare:
* After 30 years, Sally’s account would be worth $150,129.52, which still outperforms Charlie’s investment!
* If she deposited $25 weekly instead of $100 monthly (only $50 more per year), her balance after 30 years would be $165,034.94!
You get the picture. The point is that compounding interest works, and works well. If you’re not using it to maximize your money, then get to it. You don’t have to start with much; you simply have to be consistent. But you must start. Every day that you don’t have this powerful principle in your financial arsenal is money that you’re losing in the long run. Use the compound-interest calculator to play with the numbers yourself. It’s just like magic; so what are you waiting for?
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When I picked up The Wealthy Barber from the public library, I figured it must be good: the book was well-worn, the cover bent, pages dog-eared, passages highlighted, whole sections annotated in pencil and pen. Only the best personal finance books receive this sort of treatment. I’m pleased to report that The Wealthy Barber is a good read — author David Chilton offers an excellent introduction to personal finance.
The Wealthy Barber’s gimmick is that instead of presenting information in a dry subject-by-subject manner, Chilton has written the story of Roy, a small-town barber who is also a millionaire. (Roy got rich slowly.) The reader learns about IRAs and whole life insurance and compound interest as Roy dispenses advice to a trio of customers, each of whom has different financial circumstances. (This allows Chilton to highlight different approaches to certain problems.)
The Wealthy Barber’s financial planning guidelines include:
* The Ten-Percent Solution: "Wealth beyond your wildest dreams is possible if you follow the golden rule: Invest ten percent of all you make for long-term growth."
* Wills, Life Insurance, and Responsibility: "The importance of an up-to-date will cannot be overstated." Estate planning is simple, Chilton says, and can save much future grief. He also covers life insurance.
* Planning for Retirement: Chilton discusses the purpose of Social Security and explains why it cannot be counted upon, especially for the wealthy. He explains individual retirement accounts and discusses the magic of compound returns. "Start investing now!" he says.
* Home, Sweet Home: Chilton offers standard advice on buying a home, though he’s more wary than most about inflated real-estate prices. (And this was written long before the recent housing bubble.) "Paying rent is no more throwing your money away than buying food or clothing is. You need shelter. It’s one of the three basic necessities of life. Renting is one way to acquire that shelter and, in some cases, it’s a very intelligent way."
* Savving Savvy: Here’s a surprise: Chilton believes budgets are optional. He stresses saving through frugality. "A two-dollar raise [in wages] often translates into only a one-dollar increase in disposable income, the same increase that would result from saving a single dollar." If you can save $200 when buying a computer, the net effect is the same as receiving a $400 bonus in pay.
* Insights into Investment and Income Tax: The book’s discussion of taxes is run-of-the-mill, though I do love his advice about spending a windfall: "There’s simply no better alternative for the average American than to pay off his or her non-tax-deductible debt." If you get a windfall, pay off your credit cards!
* Graduation: Chilton believes a six-month emergency fund is excessive. He recommends keeping about $3,000 set aside. He also spends some time discussing college savings. And he mentions something that I’ve not discussed much at Get Rich Slowly: "Your biggest asset, by far, is your earning power."
Chilton sticks to the basics. He stresses the importance of paying yourself first, encourages retirement savings, and so on. But his advice is more pragmatic than most. He says that if you take care of the Big Stuff, then you don’t need to sweat the small stuff.
Our ten percent savings, retirement plan contributions, insurance premiums, and mortgage payments or rent are coming off the top, that is, not being taken from whatever is being left over at the end of the month. So, how we spend our discretionary income has astonishingly little impact on our financial future. As long as people are following the rest of our financial planning guidelines, how they handle day-to-day finances can safely be left up to them.
The only problem with The Wealthy Barber is minor for a personal finance book: it’s not a particularly well-written novel. Sifting through the extra passages necessary to make this a novel can make it difficult to find just the good stuff. (I’d love to see a Good Stuff version of this book with all of the narrative removed.)
Next week, I’ll share some of my favorite passages from The Wealthy Barber, which is now one of three personal finance books that I feel comfortable recommending:
* Dave Ramsey’s The Total Money Makeover is an excellent starting point for those saddled with huge debts, or for those who want financial advice from a Christian perspective.
* Your Money or Your Life is a good choice for those who want to track every penny they spend, or for people considering an early retirement. It’s also excellent for those who favor a frugal lifestyle, or are leaning toward voluntary simplicity.
* The Wealthy Barber is the best all-around personal finance guide I’ve read. It’s good for just about everyone. It’s non-technical and provides solid advice.
These are each excellent choices and are readily available at your public library.
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Read Review of David Chilton - The Wealthy Barber: Everyone's Com...
Review Summary About the Author
If you but remember this one simple tenet...
Aug 22 '01 (Updated Aug 22 '01)
Product Rating: 4.0
Pros
very light reading, very good explanations, even a bit entertaining, great overview of financial planning
Cons
full of dry humor, writing leaves something to be desired, biased in some views
The Bottom Line
A very good book which gives a wonderful overview of the financial planning world and some simple concepts for newbies to the financial planning world.
Full Review
I've recently been going through an interesting financial period in my life. I've recently graduated from college (well, for the most part, but bear with me), and I'm now finally making an income. I'm officially a member of productive society. However, being that I just became a member, that means that I've spent quite some time being a consuming member of society and producing nothing but debt. One of my friends recently introduced me to a financial advisor, who took me through the ins and outs of financial planning, and things are starting to look better for me now, which is a big plus in my book.
About a week ago, my roomate, the same person who introduced me to my financial advisor, told me about a book that he had just about a wealthy barber, and how it was basically a book about personal finance and how to eventually become rich earning only a small income. He said that it explained all sorts of concepts of financial planning that he didn't understand before (I was a bit perplexed at this point, because he had gone to the same financial advisor that I had, and I was quite sure that he had described all of this to me rather well). Since I was about to take a trip, and thus had a good amount of reading time at my disposal, I decided to give this book a try. Using my vast amounts of free airport time (I suppose I could have explored the airports a little bit more, but I figured I would just spend more time reading), I went through this entire book (and a few others) over the weekend, and here are my thoughts on this one in particular...
What is this book?
Why would I pick up a book about a wealthy barber, and what will it do for me?
The entire aim of this book is to educate its readers about financial planning. For the most part, the average American (well, I guess i could probably be much broader than that, but I'll just start there) knows diddly over squat (its a mathematical term) about financial planning. If you took the average person on the street, they probably don't have much of a retirement fund set up and they have pretty much nothing in the way of savings. If you asked them what a Roth IRA was, they would give you one of those profound empty looks that only ignorance can fuel (or good acting).
This is the type of person that this book is aimed at, the financial illiterate. Its put together in the form of a story (and a fairly bad one at that), which revolves around a school teacher who asks his father for financial advise and ends up taking a "class" from the local barber, who it turns out happens to be a financial wizard and is quite independently wealthy -- and was able to do so on a normal barber's salary. This is the thrusting point of the book, that one is able to become financially independent on a very small income, if the person uses good financial planning tactics.
To clarify my point a little bit, let me emphasize the fact that this is not a get rich quick scheme, and there are none of them espoused within the pages of this book. What are presented are sound financial planning ideas and advice that, if followed, will provide the reader with a solid financial base from which they will be provided for quite some time and will hopefully provide for their retirement and overall financial well being for the rest of their lives as they frolick in green pastures, dancing a happy dance and...
I digress...
How will it do these things for me?
I'm a complete and total financial illiterate, I can't possibly think that I'll attain such wealth through simple steps.
As should be quite obvious, this book will do absolutely nothing for you. It will not go out and do all of the work that the book tells you to do, it will only suggest that you do it. However, it will provide you with much advice on what kinds of actions to take in order to bolster your financial situation and help you to that dream of being financially independent.
Throughout the story, the main characters, who are getting the lessons from the barber himself, are told to do different things before they can go on, to prove that they are setting themselves up into the proper financial shape. If the reader follows the things that the characters did, then he/she/it will be in much better shape. However, if the reader simply reads the book and then does nothing, they will obviously get nothing out of it.
The lessons and the directions on what to do are very simple and straight forward. They don't leave much to the reader's imagination, and they aren't meant to. For instance, I will tell you here the biggest and most important message that the book has to offer, the rest of it being nothing but icing on the cake (and the cherry on top in some instances). It is simply this, save 10% of every paycheck. This is a very simple rule and one that will work if done properly. The barber then goes on to explain why this will work, and that is also rather simple: compound interest.
Simply stated, if you keep putting money into an interest bearing account, eventually that money will grow faster and faster until there are massive amounts of cash available in that account and you can be rich. This isn't something that is going to happen overnight, but it is something that will happen (it may take longer than your lifetime if you don't put any money in there, but given an infinite amount of time the money will grow to infinite amounts, and usually it will get there much quicker than you think it will). The most compelling example I heard had to do with a 401(k) account. One person puts X amount of dollars in per year for 7 years and then stops. The second person puts X amount of dollars in per year starting in year 8 and then going until he/she/it is 65. At that time, the two people will have approximately the same amount of money in their accounts. The lesson, the earlier you get started the better.
What kind of topics are covered by this book?
OK, what kind of things will this book talk about in specific?
There are about eight different chapters in the book which cover different subjects. Each of these subjects is an important part of financial planning and is useful if one is so inclined to think about them. They are also ranked almost in level of importance by their chapter numbers, with the most important information (the basic stuff) being found up at the front of the book, and the more complex (and important, just not as important to begin with) information being found at the end of the book.
Here is a quick rundown of the financial chapter headings:
Chapter 4: The Ten Percent Solution
This chapter is deceptively simple. This is where Roy (the barber) pops out the ten percent rule, which basically states that if you save 10% of what you earn in every paycheck, you will one day be wealthy.
Chapter 5: Wills, Life Insurance and Responsibility
As the chapter heading says, so the chapter text covers. There is a very interesting bit in here on life insurance (one of the points that disagreed with my financial advisor), but this is all good information in here again.
Chapter 6: Planning for Retirement
I'll admit that I'm already planning for retirement (and I'm in my early 20's). This chapter is very good at dissecting the different retirements plans and the ways that you can go about doing them. It is a must read for everyone, even those who think they know everything about retirement plans (there are some gems of wisdom in here).
Chapter 7: Home, Sweet Home
This chapter goes through the ins and outs of home ownership, when its an advantage, and when it is not. Contrary to popular belief, in the opinion of the author, it is not best for every person to own a house, there are situations where they should probably just rent.
Chapter 8: Saving Savvy
The brunt of the information in this chapter is theory on saving and what you should do to actually save. There are different sides of the coin to the point of clipping every coupon to just not caring about them at all. However, there are some theories on savings in here that will actually make you think a little bit before throwing away the paper with those coupons in it. However, all of the information this chapter gives is quite practical, and Roy states the fact that most people don't want to listen to his advice on this.
Chapter 9: Insights into Investment and Income Tax
This chapter does have some interesting information in it, but in terms of its applicability and immediacy, it lags far behind the information in the preceding chapters.
Chapter 10: Graduation
This chapter covers not only the end of the story, but a few odds and ends in the financial planning universe. The big subjects in here are emergency funds, saving for education, disability insurance, saving in your children's name and other such fun things.
Since I had a basic grounding in the world of financial planning before I started reading the book, the first few chapters were actually pretty simple for me as I understood what they were talking about already. It simply reinforced ideas that were already in my head. However, there were some things in the book which disagreed with what I had been told by my financial advisor. I haven't had enough time to think about these things, or to talk to my financial advisor about them, so at this point I can't really tell you which one was more informed. I can say that it made me think about the situation which is probably just as good as anything since it brought all of this to my attention again.
Later in the book the topics become a bit more complex and thus the simple way in which the points are brought across tend to fall apart a bit, making you have to reread things a few times to get what they are trying to say.
And now for an ending
I really don't know what to subtitle here, so I'm just going to put some random words and hope you don't care
The main lesson of the book is simple, if you save 10% of everything that you earn, you will someday be wealthy. It also harps on the idea of forced savings (paying yourself before you pay everyone else, which forces you to save). These two lessons are the brunt of the information in this book for good reason, they are the best lessons to learn. However, don't let this take away from the information in the rest of the book, as its quite valuable as well.
Quite simply... this book is wonderful for people who don't know what is going on in the financial world and would like a few tips on how to get going properly and build a solid financial base. This book won't get you rich quick, but barring extraordinary circumstances it will set you up with a nice nest egg with which to base your financial future on.
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